Question

(15) QUESTION 3 (IAS 16) Fire Ltd commenced in 2019 with the manufacturing of wood products at a new plant. The plant was purchased on 1 January 2019 for $700 000. During January 2019, some equipment was installed and other equipment was modified. Installation and modification cost amounted to $130 000. For security reasons a fence was erected at the plant at a cost of $20 000. The plant was ready for use on 1 February 2019. An opening function was held in the plant on 15 February 2019 at a cost of $50 000 in order to entertain customers and to introduce the new products to be manufactured at this plant. Production only commenced on 1March 2019. The plant has a useful life of 10 years and the residual value was estimated at $200 000. Expected scrapping costs amount to $140 000 (discounted present value of scrapping costs equals $100 000). Assume that the provision for scrapping costs will be raised in accordance with IAS 37. At the end of August 2019 heavy rain caused severe damage to the houses of the employees in the region. Management granted special leave to all the employees of the plant to attend to the repair of their houses. The plant stood idle during September 2019. The company's year-end is 31 December Required: a) Calculate the cost of the plant. (5) b) Calculate the depreciable amount of plant. (3) c) Calculate depreciation for the year ended 31 December 2019. (5) d) Calculate the carrying amount of the plant on 31 December 2019. (2)

Answer 1

	Cost of Acquisition:
A	Purchase		700,000.00
B	Installation		130,000.00
C	Fence		20,000.00
	Cost of the Plant (A+B+C)		850,000.00
	Note: Expense for opening function not to be included in the cost of the plant
	Depreciable Amount
	Cost		850,000.00
Less	Residual value		200,000.00
Add	Scrapping cost		140,000.00
	Depreciable Amount		790,000.00

Depreciation for the year ended 31st Dec 2019:
Depreciation = Plant cost/Useful life
=790000/10
Depreciation for the year 2019		79,000.00

Carrying Amount of the Plant at the end of 2019:

790000-79000

Cost of the plant - Depreciation

711000 (Carrying Amount)

Note: Plant idle time due to rain should not be considered for calculating depreciation as depreciation should be calculated as per useful life and it is a period cost.